Sunday, June 3, 2012

Gold and the 61.8% Fibonacci Retracement Level

I was looking at where Gold finished up last Friday afternoon and saw something that piqued my curiosity. The low last December was around $1524 and the high following that was around $1792 in late February. And last Friday price closed at about $1628. Hummmm... I began to wonder why price stopped at that particular price level. $1628 - what is so special about $1628?

Never satisfied with not knowing the answer to something I think I can figure out myself, I took a Fibonacci measurement and there it was - $1628 is the 61.8% retracement level of the December low and the February high.

Well, so what and who cares?

But instead of letting it go at that I began to wonder a little more. I wondered how often the price of gold makes these curious 61.8% retracements. Is it random or does it happen frequently? 

So of course I had to find out and that is what this post is all about. But first, here is the first chart that seduced me to spend 4 hours making the next three charts.

Click on any chart to ENLARGE

As you can see, gold stopped last Friday right at the 61.8% retracement level of this nearly 5 month long intermediate cycle.

That was a really big move last week. I wonder if it will retrace? I guess one way to find out is to study a 60 minute chart during this entire intermediate cycle period and see what I find out. The task I assigned myself was to find evidence that gold rallies retrace 61.8% - so I did and here is what I found out.......

This first chart looks only at the month of January. Though not particularly elegant I decided to draw a light gray line at the location of 0% retracement, then use a particular color to identify the 100% level and below that, using the same color, the 61.8% level. For each instance I decided to use a different color hoping to make it a tad easier to count the frequency of these curious retracements.

Wow - that's rather interesting. There were 7 of these things and an eighth that is part of a bigger 61.8% retracement that will find its conclusion on the next chart. As a matter of fact, it looks like every single rally was followed with a 61.8% retest...except the monster rally of January 25. That particular advance, by the way, was followed by numerous retests of the 50% retracement level which are not shown.

Okay, next chart. This one of the month of February.

Looks like 4 incidences to me, not including the larger one (magenta concluding on the far right) that began on the previous chart. Once again it appears that most rallies do indeed retrace 61.8% - and usually within 10 trading days or less.

Last chart. At this point my eyes were screaming they had enough so I made this chart to cover March - May. (You can do that when you write this stuff for fun and not for money).

Here again it looks like we caught some more fish - like about 9 more. 

Oh, before I forget, the diagonal magenta line traversing bottom left to mid right is that C-Wave trend line I wrote about a couple posts ago - discovered when I changed my display to log scale. And note that it became resistance for price last week. Should we be surprised?

So, one last maddening question. If last Friday's rally was a short term top (as it appears to be at the 61.8% retracement of this intermediate rally and also against the resistance of a multi-year trend line) I wonder what price level would qualify for a 61.8% retracement of Friday's rocket ride?

OK, I put a little red line on the side of the chart. $1578

And if the way this works uses instead the lower $1532 low of Wednesday morning, the calculation comes out to $1570.

Well that's it. Best to you and your trading this week,


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